The cost of overdrafting a bank account could drop to $3 under a plan announced by the White House, the latest move by the Biden administration to fight the fee, which it says places an undue burden on American consumers.
The change could wipe out billions of dollars in fee revenue for the nation's biggest banks, which were bracing for a battle ahead of Wednesday's announcement. How much revenue depends on which version of the new regulation is adopted.
Banks charge a customer an overdraft fee if the customer's bank account balance is less than zero. Overdrafts began as a courtesy offered to some customers, as paper checks took days to clear, but grew with the popularity of debit cards.
“For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that have hit vulnerable Americans the hardest, while banks pay their bottom lines,” President Joe Biden said in a statement. “Banks call it servicing — I call it exploitation.
Under the proposed rule, banks can only charge customers what it costs them to provide overdraft services. This requires banks to report the costs to the Consumer Financial Protection Bureau.
Alternatively, banks can apply a core charge applicable to all affected financial institutions. Regulators proposed several fees — $3, $6, $7 and $14 — and would gather industry and public input on the most appropriate amount. The CFPB says the figures come from looking at how much it costs banks to cover losses from accounts that go negative.
According to a Bankrate survey last August, the average overdraft fee was $26.61. Some banks charge up to $39. The nation's largest banks receive about $8 billion in overdraft fees each year, according to data from the CFPB and banks' public records.
Biden has made eliminating “garbage tariffs” one of the cornerstones of his administration's economic agenda heading into the 2024 election. Overdraft fees are at the center of that campaign, and the White House last year ordered government regulators to do everything in their power to further curtail the practice.
“We're proposing rules to close a long-standing loophole that has allowed many big banks to turn overdrafts into a giant junk fee harvester,” Rohit Chopra, director of the Consumer Financial Protection Bureau, said in a prepared statement to reporters.
Banks can offer small amounts of credit to overdraft customers, acting like a credit card. Some banks like Trust Bank now offer that kind of service.
The CFPB has been planning to cut overdraft fees for months after regulators released reports and bureau studies that showed overdraft fees hit the poor and families the hardest.
In response, Banks has mounted a massive lobbying campaign to reject the Biden administration's proposal. Whatever proposal is accepted is almost certain to be challenged in court.
The rules apply only to banks with more than $10 billion in assets, the 175 banks that make up most of the financial institutions with which Americans do business. The rules exempt smaller banks and credit unions, some of which rely disproportionately on overdraft fees. CFPB officials told reporters that most Americans have chosen to focus on the largest banks at these large institutions, where widespread fraud has historically occurred.
If this has happened to you, it probably hurt you. It is estimated that 85% of Americans have paid for them at some point.
Decades ago, banks created a service that allowed some checking account customers to go negative on their accounts. After the proliferation of debit cards, which started as a niche service, it became a major profit center for banks, allowing customers to debit small and large amounts of money from their bank accounts multiple times a day.
Overdraft fees are a financial boon for the banking industry, with the CFPB estimating that banks have collected $280 billion in overdraft fees over the past 20 years. These charges became so popular that one bank CEO named his boat “Overdraft.”
Under popular and political pressure, most major banks have added safeguards to customers' accounts that allow them to bring the balance back into positive territory before making a charge. Bank of America, once considered by industry critics the biggest abuser of overdraft fees, cut its fees from $35 to $10 two years ago and says overdraft fee revenue is now less than 10% of what it was.
While overdraft fees have dropped in recent years, a Bankrate survey found that 91% of bank accounts still charge overdraft fees.
If the rule is adopted and faces political and legal challenges, the new regulations will go into effect in the fall of 2025.